John Cook

Rolling Stone's Tim Dickinson has a devastating story gutting one of Mitt Romney's origin myths as a "Turnaround Guy." Romney has always taken credit for rescuing Bain & Co., the consulting firm where he got his start (as distinct from Bain Capital, the private equity operation he later co-founded) from the clutches of bankruptcy by dint of fearless resolve, hard work, and common sense. The truth: He raided its coffers for executive bonuses even as it owed millions to the federal government, and used the resulting lack of cash as leverage to screw over the company's creditors.

In 1992, Bain & Co. was in deep debt with few prospects. Revenues were down, and it was increasingly unlikely that the company would be able to meet its considerable debt obligations. Romney, who had been brought into rescue the company a few years before—and had met with some initial success—was busy trying to negotiate with the firm's creditors for room to breathe. One of those creditors, to the tune of $30.6 million, was the Federal Deposit Insurance Corporation, which had recently taken control of a failed bank that Bain owed money to.

Under normal circumstances, such ample reserves would have made liquidating Bain an attractive option: Creditors could simply divvy up the stockpiled cash and be done with the troubled firm. But Bain had inserted a poison pill in its loan agreement with the banks: Instead of being required to use its cash to pay back the firm's creditors, the money could be pocketed by Bain executives in the form of fat bonuses – starting with VPs making $200,000 and up. "The company can deplete its cash balances by making officer-bonus payments," the FDIC lamented, "and still be in compliance with the loan documents."

What's more, the bonus loophole gave Romney a perverse form of leverage: If the banks and the FDIC didn't give in to his demands and forgive much of Bain's debts, Romney would raid the firm's coffers, pushing it into the very bankruptcy that the loan agreement had been intended to avert. The losers in this game would not only be Bain's creditors – including the federal government – but the firm's nearly 1,000 employees worldwide.

In the end, Romney made good on his threat and distributed so much of the company's cash in bonuses that "dissolution of the company [became] a likely scenario," according to FDIC documents. Faced with a company that no longer had any liquidation value—the FDIC even tried to estimate the value of its office equipment—Bain's creditors, including the government, took a massive 50-cents-on-the-dollar haircut on the debt.

The FDIC got just $14 million of the $30 million Bain owed. It's unclear what the firm's executives got in bonuses—that information is redacted from the documents. But it is clear that the "Bain turnaround" consisted of rewarding failed executives while screwing over the government—AIG lite.

Update: As several commenters have accurately noted, the Federal Deposit Insurance Corporation, while a federal agency, is funded by premiums levied on banks rather than appropriations from the U.S. Treasury. As such, it's more accurate to say that Romney's gambit screwed over the government, as opposed to taxpayers. I've corrected the headline, which used to read "Mitt Romney Looted a Dying Company For Executive Bonuses While It Owed Taxpayers Millions," and a few other references. It's worth pointing out, however, that the FDIC has a line of credit with the Treasury and offers an explicit assurance that "the resources of the United States government stand behind FDIC-insured depositors." And both the banking crisis of the 1980s and early '90s and the recent global financial meltdown threatened to bring those resources into play.